The Next Big Risk
Preview of the 2010 Investment Innovation Conference.
BY Scot Blythe | November 11, 2010
As a speaker at this month’s Investment Innovation Conference in Arizona (November 30 – December 2), Michael Hyman, president, chief executive officer and chief investment officer, River Plate House Capital Management Inc., will be sharing his views on the three big risks that pension plans now face. In advance of the conference, we asked him to describe those risks and sketch the path to their resolution. To find out more about Michael’s presentation and the Investment Innovation Conference, click here.
Q: What dynamic risks do pension plans face and how serious are they?
A: There are three risks: purchasing power, and that’s ensuring that you make enough money above and beyond the inflation rate or the cost of living rate. Forget about inflation indexes, this is the real cost of living. Inflation-linked pensions, they’re only inflation-linked to the official indexes and needless to say that doesn’t give you the individual protection. If your goods and services are going up 10% and you’re only getting an adjustment of 2% from an inflation-linked plan you’re going to find yourself wanting.
The second one is asset-liability mix – what’s called the asset liability deficit and that is catastrophic because it shouldn’t have happened to begin with. In this instance – depending on your liability assumptions – in the United States alone that risk represents $8.8 trillion.
And then there’s the longevity risk, which is basically outliving your assumptions, your mortality assumptions whether its insurance, a pension fund or even a defined contribution plan. That is representing globally I think a minimum of $6 trillion of the present funds that are available and I think that that’s quite an understatement because the new middle classes are going to be joining in on that statistic as well.
Q: How do you go about solving these risks?
A: Basically be cool and calm. What I’ll be presenting are three solutions to coolly and calmly hit singles. We’re not trying to hit home runs. The days of throwing darts at a dart board are over. When I came into this industry, it was all about asset liability management and real returns. It’s almost going back to the old economist Irving Fisher and back to looking at real returns on investments so they ensure that you keep up your purchasing power.
Also, you use your investment process in a different way to manage your money to build up the assets to meet your liabilities.
And longevity risk, it’s really almost a government problem and sadly the government is doing nothing about it. But they should be issuing what’s called longevity bonds which help hedge. The problem with that risk is that if no pension funds are going to solve it, then everybody will follow the herd, unfortunately, until government does something about it to create some sort of transparency in the pricing of this risk.
To learn more about the Investment Innovation Conference, visit the events section of the website. If you are interested in attending the event, please email Garth Thomas to be considered, as limited space available.